China money rates rise on tight liquidity, c.bank maintains targeted policy

Fri Aug 29, 2014 1:02am EDT

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SHANGHAI, Aug 29 (Reuters) - China's money rates rose this
week as initial public offers (IPO) and month-end factors
tightened liquidity, but gains were capped as the central bank
injected more funds into the market, traders said. 
    The weighted average of the benchmark seven-day bond
repurchase agreement stood at 3.64 percent by
midday on Friday, edging up 25.01 basis points from last week's
close. 
    The overnight repo rate was at 2.90 percent, 
up 5.91 basis points. Another actively traded tenor, the 14-day
repo, rose 35.03 basis points for the week to
4.27 percent.
    Ten companies opened IPO subscriptions on Thursday and
Friday, which is expected to lock up as much as 1 trillion yuan
($162.69 billion) of funds until earlier next week. 
    On Thursday, overnight pledged bond repurchase agreements
 touched 50.5 percent - the highest level since last
October - and the two-day pledged repo hit a record
high 97.0 percent.
    The pledged repos, traded on the Shanghai Stock Exchange,
are a derivative fundraising tool used in China's stock
exchanges to raise funds for quick transactions.
    Month-end factors also put pressure on cash demand this
week, traders said, as Chinese banks typically need more funds
to meet regulatory requirements such as loan-to-deposit ratios
at the end of the month.
    "The liquidity is tight, but not as tight as expected as
some big state-owned banks have been lending money to support
the market since yesterday," said a trader at a Chinese
commercial bank in Shanghai.
    The People's Bank of China (PBOC) has also increased the
liquidity supply this week, injecting a total of 105 billion
yuan into the money markets via open market operations and
deposit auctions. 
    After Thursday's regular open market operation, the central
bank has now injected a net 24 billion yuan of money so far this
year, the first time in 2014 the figure has turned positive, as
it continues to ensure sufficient liquidity in the system amid
signs of slowing economic growth.
    
    TARGETED EASING
    Traders expect liquidity conditions to improve from next
month also as the central bank is expected to stick to its
targeted monetary policy to boost the economic growth in the
world's second largest economy.  
    On Wednesday, the PBOC said it cut re-lending interest rates
for loans to the agricultural sector by one percentage point,
the first time that it publicly confirmed targeted interest rate
cuts. 
    "Despite the limited impact of this targeted interest rate
cut given its size, it further sends out signals that the
central bank will continue to hold the targeted policy easing
stance for now," said a trader at a Chinese state-owned
commercial bank in Shanghai.
    But he added that if the August economic data remains
sluggish, it is possible the PBOC would resort to a broader
monetary easing, including reserve requirement ratio or interest
rate cut.
    The State Council, China's cabinet, said in a statement on
Wednesday that China will maintain its "targeted" policy stance
to keep economic growth on track. 
    The world's second largest economy has seen softness again
since July, suggesting more policy support is needed to boost
the economic growth in the near term. 
    A Reuters poll showed on Thursday that activity in China's
vast factory sector likely weakened in August as demand
faltered. 

SHORT TERM RATES: 
 Instrument      RIC               Rate*    Change (weekly,
                                            bps)**
 1-day repo                           2.90               5.91
 7-day repo                           3.64              25.01
 14-day repo                          4.27              35.03
 7-day SHIBOR                         3.54               16.9
 
*The volume-weighted average price (Vwap) at midday Friday
** Compared to the Vwap at market close the previous Friday
 
KEY INTEREST RATE SWAPS:
 Instrument            RIC             Rate     Spread (bps)
 2 yr IRS based on 1                     2.908               -9
 year benchmark *                               
 5 yr 7-day repo swap                   3.8300               83
 1 yr 7-day repo swap                   3.5850               59
 
*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

GOVERNMENT BOND FUTURES
 Instrument        RIC               Price    Weekly change
                                              (%)
 Sep 2014 5 yr                         93.33            0.18%
 Dec 2014 5 yr                         93.75            0.18%
 Mar 2015 5 yr                         94.16            0.25%
 
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
        MARKET DRIVERS
    - Commission rates for dim sum bond underwriting squeezed in
first half 
    - Lending relaxation to help stabilise market interest rates
 
    - Beijing crackdown on insider trading "rates" sparks
industry exodus 
    - As cash crunch anniversary looms, traders guess at c.bank
policy direction 
    - China money dealers see stability, not easing, going
forward 
    - Muted impact of capital inflows a step towards
liberalising deposits 
    - Tax man's attack on shadow banking startles markets
 
    - China eases Jan credit squeeze with cash, surprising
transparency 
    - Market braces for bouts of tight liquidity in 2014
 
    - Beijing eases corporate debt rules to offset crackdown
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    
    DATA POINTS
    - Fiscal deposits drive interbank liquidity trends GRAPHIC:
link.reuters.com/pem75t
    - Chinese government bond curve rises on rate reform
expectations GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve rises, flattens on
liquidity fears GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on risk aversion GRAPHIC: link.reuters.com/bas95t
  
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   


(1 US dollar = 6.1465 Chinese yuan)

 (Reporting by the Shanghai Newsroom; Editing by Kazunori Takada
and Eric Meijer)
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